Audio Transcript

James Mintert: Thanks for joining us for our podcast focused on U.S. and Indiana farmland values, the 2024 update. I’m Jim Mintert, director of the Purdue Center for Commercial Agriculture, and joining me today are my colleagues Dr. Todd Kuethe, who’s a professor here in ag economics, and Michael Langemeier, who’s also a professor of ag economics and associate director of the Center for Commercial Agriculture.

[00:00:26] Farm Sector Balance Sheet

James Mintert: Todd, let’s talk a little bit about what’s taking place here with respect to farmland values. And I guess our starting point is really the Farm Sector Balance Sheet, which was published, uh, actually just this past Friday, uh, by USDA’s Economic Research Service. And I know you and Michael both take a close look at that when that report comes out, so I’ll, I’ll kick it off by maybe letting you and Michael comment on that.

Todd Kuethe: Sure, for me the big thing is it gives us sort of a idea of what is happening at the national level in terms of the farm sector. How they’re managing both debt and assets, right. And so the big takeaway for me is always looking at what they’re projecting or forecasting, aggregate land prices to look like, um, and then also how that sort of fits in with the rest of the balance sheet.

And again, farmland is the major share of assets for the farm sector. They’re showing a 83 percent of all of the assets, right? So that’s why when we think about things like long run financial planning, farmers’ retirement, everything sort of always comes back to sort of what’s happening with the land values. But I know Michael maybe thinks about things a little bit differently as farm management.

Michael Langemeier: Very consistent with that I mean, I I think you’d care to characterize the the over of the aggregate farm sector balance sheet as being very strong And in particularly in the in the non current side of the balance sheet and that’s primarily because we’ve seen some pretty healthy Increases in farmland. We’re going to look at a US farmland in the Uh, trends here a little bit, but they’ve pretty much just been going up for quite some time now. And so that’s made this non current portion of the Farm Sector Balance Sheet really strong. I do want to comment a little bit on the debt to asset ratio. It’s coming in at 12.8%. It’s very important to keep in mind that includes part time farms, semi retired farms, full time farms. If you look at the debt to asset ratio for full time farms, it’s much closer to 30%. And so if you look at farms that are doing this for a living, they do tend to take on a little bit more debt. But nevertheless, 30 percent is still a really healthy debt to asset ratio. And with strong farmland values, that balance sheet, it remains strong.

Todd Kuethe: When I was try to remind, like, my students or extension audiences that this debt to asset ratio is really just sort of what is the aggregate debt in the farm sector and what is the average, or the aggregate assets, and then looking at the relationship between those two. Not that it really captures any person or subset of the farm sector or the subsector. It’s really sort of like national accounts. The way we think about things like unemployment or inflation of, like, what is sort of the macro perspective on how the farm sector looks. Um, and, and it sort of for the last 20 years has sort of hung around that, sort of fluctuating around that 13, 12 to 14 percent, uh, debt to asset ratio, right?

So it’s part of the reason that our sector is viewed as like, at least very stable and kind of a long run financial viewpoint. Even if we have sort of periods that are, that are challenging. Uh, if you look at sort of the long, sort of slow moving arc of the, of the sector, it’s, it’s usually pretty healthy.

Michael Langemeier: Yes.

James Mintert: But I think Michael’s point is the fact that if you look at the debt to asset ratio, for example, for corn belt farms that are engaged in growing corn and soybeans, which is the group that we talked to a lot, that picture looks a little different, right? And I think your point, Michael, is at least entering into this downturn of commodity prices that we’re seeing. We’re still walking into this with a pretty strong debt to asset ratio.

Michael Langemeier: Yeah, and just trying to emphasize, what we’re trying to do here , is just to tell people, even though we’re looking at weaker incomes, and we can talk about incomes in more detail, but even though we’re looking at weaker net returns, weaker incomes, particularly lower net returns for corn and soybean producers, because farmland is still valued fairly high, we’ve got a strong balance sheet.

James Mintert: Yeah, good point. So when, when you start to worry is if we see some weakness show up in farmland values.

Michael Langemeier: Yes.

Todd Kuethe: Yeah.

James Mintert: All right.

Michael Langemeier: And so there’s a reason why we focus so much on farmland values.

[00:04:24] National & Regional Farmland Trends

James Mintert: So Todd, you spent a number of years working at USDA’s Economic Research Service and so you’re kind of the inside man with respect to knowing how USDA collects data with respect to farmland values and also how we collect data here in the state of Indiana with the Indiana Farmland Survey and they’re different.

So let’s talk a little bit about the values that USDA collects and we’re going to start off by looking at the long run U. S. farm real estate value, but we’ll also look at some broader cropland values as well. Talk to us a little bit about how USDA collects data because those numbers are different than what you show and what Iowa State shows, what University of Illinois shows, etc., right?

Todd Kuethe: Yes, a lot of what the land grants do is we tend to work with, as we do here with our survey, work with appraisers or lenders, folks that are involved in farmland transactions. The USDA surveys principally, USDA generally, surveys farmers a lot, right? So, uh, this actually comes from what they call the June Agricultural Survey, or it used to be called the June Area Survey, which is mostly about production and what crops farmers are growing in the summer, right? It’s taken in June. Um, and then there’s a couple of questions in there about land values and cash rent. And so NASS, uh, assembles those from those individual surveys and they’re They survey, you know, thousands and thousands of farmers around the country in what, what, uh, what we call sort of a stratified, uh, survey.

And so they’re surveying intensively in places that a lot of agricultural production is taking place. Um, and surveying, uh, to get an accurate picture of sort of what crops are in the ground. That’s the main point of that survey, um, and, and then they sort of aggregate up by, so they ask initially, like, what is the land that you’re farming, what do you think it’s worth, or what’s the expected market value of the land, as of sort of June, um, of that year, and then it gets aggregated up at the state, state NASS offices and up at the national offices. And at the beginning of August, they release this annual land values cash rent report, which is historically sort of called like the gold standard of farmland values.

Um, but one of the issues is it’s sort of what I would say is a better measure of sort of the stock of farmland, right? If you think the stock of the asset of land we have in the country. Um, where our surveys and the ones that, uh, similar surveys around the country run by land grants is really acting people that are involved in the marketing, right? Which is more of like the farmland Flow of farmland. So looking at that sort of 2 percent that changes hands is really informative to what we think of in the value. Where what USDA reports is what is the aggregate stock of land. And so that’s why you tend to see it move much slower. It’s not quite as dynamic.

Um, but again, it still picks up, you know, since 2020, we’ve had this sort of continued high growth in land prices at the national level. This is the lower 48 contiguous states, um, where we see sort of a flat after that high growth period out of post RFS commodity price boom. Then it kind of flattened off for a while. Then around 2020, we see it take off again. Um, and so that’s sort of the long run and that’s kind of the difference by why we pick up, um, a little bit difference in sort of what we see per acre estimates.

James Mintert: So even here though, when you look at the aggregate value for farm real estate values, Over the last roughly four to five years, that’s a pretty sharp move upwards. Even in those values, the dollar value looks low because it’s 4, 170 per acre, which sounds low. But if you look at this change that’s taken place since about 2020, it’s pretty dynamic.

Todd Kuethe: Yeah, particularly for these sort of large aggregate surveys, it’s hard to get them to move. Quite a bit right there. They’re looking at what is what, you know, everything we define is The other thing I should point out is that this is their value for farm real estate, right, which includes building structures, improvements, right. This is sort of the biggest aggregate number we can think about in terms of what we would classify as farmland or agricultural land. Um, and so, yeah, to see that kind of persistent growth rate means that like prices were really growing.

James Mintert: Yeah, so we saw a big upward move these last four to five years, and that’s even maybe a little more apparent when you start looking at it at the individual state level, and you did a comparison of Illinois, Indiana, Iowa versus the U. S. number.

Todd Kuethe: Yeah, and so this is again that farm real estate, they release it for the states. They also report crop and pasture, crops split into irrigated and non irrigated. Generally, I think USDA numbers, the bigger area, the bigger bucket of things you’re looking at, the more I feel like they do a really good job tracking it.

Sort of like we were talking about balance sheets, if you want to think about individual farms, there may be better sources of information for that, right? And really, I always look at this to see, A couple of reasons. One, I think people here in Indiana always think about the sort of that I-State region. Um, and you can really see the, we have the same dynamics that we see sort of the national level. But again, when we include the national level, uh, it looks, those changes look almost flat compared to what we see here in the Corn Belt. So, we tend to appreciate a lot higher when we do. And then when there are periods where it dips, it tends to dip a lot more. So it’s much more dynamic.

Um, and those Again, I think a lot of farmers, farmland owners, when they look at the USDA values, still think that they feel like they’re always very low. Um, again, sort of how they track that data, but you can really see that appreciation, what we saw, you know, sort of coming out of 2020, that rapid uptick.

James Mintert: So, you know, when I look at the USDA numbers versus the numbers that you publish for Indiana or, Iowa State publishes for Iowa, for example. I think the difference, from my perspective, is more along the lines of the land grant university surveys are picking up what’s taking place on the margin. Those are based on transactions that have occurred recently.

It’s not transaction data. But it is based on recent transactions, whereas when the USDA surveys people, it’s, it’s asking people what do you think that property is worth, which is influenced by recent transactions, but really has kind of a little more of a longer term perspective to it.

Todd Kuethe: Yeah, and it’s almost more of like a balance sheet measure, right? What is, what’s the, what is what we have, what is that worth? Which is different than what’s selling right now, right?

James Mintert: So looking at the numbers, USDA was up this year, right? And if you look at Uh, what the lead number there is Iowa at 9,420 per acre. Illinois is at 8,700. Indiana comes in at 8,510. Michael, I know you’ve taken a look at this with respect to what accounts for those differences across states. What do you, what do you see?

Michael Langemeier: I think, I think it’s very consistent. If you think about corn yields, Uh, the higher corn yields tend to be in Iowa and in central Illinois, but by the time you factor in southern Illinois into there, that brings, that brings their number down a little bit, and so I, I think it’s very consistent if you look at, at corn, uh, corn yields going from Iowa all the way to Indiana.

A couple observations here that, that I think are very important when you’re looking at long run trends. I, I talk a lot about, uh, what, what has happened since 2007. Uh, when we were starting the ethanol boom, that’s usually the time period I pick, uh, to talk about these trends. And both the U. S. data and the three I states have more than doubled. Land values have more than doubled, uh, since 2007. Uh, and I, I want to, I want to bring that up because that’s so important to the balance sheet. As long as the farmland values still stay relatively high, we’re going to have a strong balance sheet because farmland is over 80 percent of the, of the US balance sheet.

Another observation, when you look at the I states, it seems to me that Illinois and Indiana are more correlated. They seem to track each other a little closer than Iowa, though Iowa is also correlated with these other two states, but not as much. And in particular, uh, I don’t think I’m, this isn’t, um, I’m making something up here, Todd. It seems to me, Iowa has higher, Higher highs and lower, and when there’s an adjustment downward, they send it just more than Illinois and Indiana. I don’t know if that’s part of the urban influence coming from Illinois and Indiana or what’s going on there, but it’s very evident when you look at the Iowa State survey and also the U. S. data for Iowa, Illinois, and Indiana.

James Mintert: That’s an interesting point.

Todd Kuethe: Yeah, you know, there’s, um, there’s a lot of sort of discussion of why maybe Iowa’s different, right? They also have some different ownership laws about who’s allowed to own farmland, uh, limits on how land can be subdivided by a single owner. There’s a lot of people that, and we have some colleagues here in the department working with folks at Iowa State trying to maybe look at some of those issues about maybe how different policies might be interacting there.

Um, But yeah, I mean, there’s also the sort of the agronomic part of it. Most, most of Iowa’s, you know, very productive, um, and, and so they don’t have sort of large forested portions or, um, I mean, I guess you can go back to glaciers or something to think about how that, uh, the, that soil gets allocated. Uh, but I, I really think it, like you said, it really comes down to sort of How much output can you get per acre, and then people basically buy access to that output for the life they’re going to hold it.

James Mintert: Yeah, so you look at those differences across state, most of the differences can be explained by, uh, yield. Which means you’re looking at, if you look at value at a per bushel basis, they actually come out fairly close with a little more extreme volatility on the Iowa values.

[00:13:54] Indiana Farmland Value Survey & 2024 Findings

James Mintert: All right, so let’s turn our attention, those are the USDA numbers, let’s turn our attention to the, uh, Purdue survey, which has been going on since the mid 1970s, and you’ve taken charge of that here these last four or five years. So explain to us a little bit about what you do with respect to the Purdue survey.

Todd Kuethe: Yes, I mean, I always kind of start with kind of why do we do a survey? Um, and, you know, it was started in the late 1970s for a reason, which is when we had sort of exploding land prices and people were really concerned, you know, wanted to get a better idea of what’s going on here. Um, and at that time, uh, there were limits to, uh, how you could access transactions. So the best thing to do was to survey people involved in, in those transactions. So we’ve continued that tradition. Uh, since the late 1970s, uh, where we ask people who, we define it as people who interact with land markets as part of their regular job. So that’s usually a lot of appraisers. We have some lenders in there. Um, there’s a few sort of, you know, farmland owners, um, in there as well. Um, and just sort of get an idea of what does the land market look like when we do the survey.

So it’s always done in June. Um, but then obviously, Uh, we’re always interested in kind of the winter time where land sells a lot more, also that’s when people kind of think about their balance sheet generally, so we ask about the June, land values that June, but also the previous December, and then make some projections what they think the year will end up at the end of December.

Um, and we, the things that sort of differentiate our survey, in addition to, uh, who we ask, but also we split it out by, uh, Uh, quality grade. So the USDA, it’s just sort of your farm, right? We’re here, we are asking people, selling, what do you think about the top land, the average, the poor land in your market? We don’t really define those for them. We, well, part of the thing is we have, our participants usually have done it for a very long time, so they think about this nationally, but we ask them what, what is the, so we ask them about the counties that they operate in, and then, or they, they serve, in their business, and then top, average, and poor, and we ask about corn yields. What’s the expected long run corn yield or productivity of top in your area or average area? So recognizing that top quality land in some parts of the state is very different than top quality land in other parts. But it allows us to sort of put that in that productivity difference.

Um, and then we also ask about cash rental rates. Um, but that’s sort of the basic structure of our survey.

James Mintert: So tell us again who you talked to. You talked to people engaged in the land markets.

Todd Kuethe: People that, people that interact with the land market regularly as part of their professional life. So, mostly appraisers, farm managers, lenders, um, and then we have a few other folks in there as well.

James Mintert: There are some producers in there, but not a lot, right?

Todd Kuethe: Yeah, correct.

James Mintert: That’s not a large portion of your survey, so.

Todd Kuethe: Correct.

James Mintert: So again, it kind of gets at this idea that, um, you’re capturing values that are more on the margin because it’s based on recent history of transactions, even though it’s not individual transaction data.

Todd Kuethe: Yeah, we sort of asked them what, what is sort of the typical value? For this, each quality grade in the market that they work in, in the county that they’re in.

James Mintert: Alright, let’s get to the numbers, because that’s what probably listeners have been waiting for.

Todd Kuethe: Yes.

James Mintert: So, what’d you find out for this year versus last year?

Todd Kuethe: Well, um, so prices are up about sort of 4%, somewhere between, three and a half to 5% kind of in aggregate, um, across the state for top, average and poor. Uh, and that’s sort of the, um, most likely outcome over the history we’ve done the survey, right? That’s sort of. Uh, four to 5 percent increases, uh, very different than what we’ve experienced the last several years, where we had record high appreciation in 2020, really strong appreciation in ’21, ’22. Um, and so now we’re sort of back to kind of like, what I would say is sort of the expected kind of market activity. Um, so prices are up a bit.

The other thing is people always kind of look at these threshold values, right? So we are above 14 at the top. Um, We’re, uh, approaching 12 still in the 11 bucket at the average, uh, and above nine at the poor, right? So people seem to always kind of look whenever we crossed one of these sort of thousand or 250 or 500 threshold, that sort of, uh, uh, people kind of anchor to that, right?

Yeah, so rounding off slightly, you came up with 14, 400 at the top levels for Indiana for this year. Average was at 11, 600 and then just barely above 9, 000 for the poor quality land.

So, your percentage range is, kind of your lowest one was actually for the average quality at 3. 7. Your highest increase was actually shown for the top quality, 4. 8%.

Michael, as you look at those numbers, how does that correlate with what you were expecting to see?

Michael Langemeier: About what we were expecting, I think Todd, Todd, both of us were talking 0 to 5 percent increase, and we fell in there.

And let me talk a little bit about why land values tend to go up. There’s a couple things going on there. First of all, we asked them for long term yields. They go up every year. 2-3 bushel. You can just, pretty much like clockwork, 2-3 bushel increase in those poor, average, and top corn yields. And so the productivity, we’re getting more from that soil, and so that would tend to have some upward pressure, but more importantly is inflation.

Uh, and so, and so you can, you can easily explain that long run average. I think you go back to 1960, Todd. I think the average increase in farmland value is about 5. 5%. So, time to get inflation in there, increase in productivity, you can explain why land values tend to go up. That doesn’t mean they always go up, but there’s a reason long term why they tend to go up.

James Mintert: And you know, Michael, thinking about your comment earlier about land values doubling since 2007, that actually fits right in with that long run average, right? Even though there were some years and there were some big jumps, there was also some weaker years as well, and so over that longer period of time, you’re right back to that, pretty close to that average, right?

Michael Langemeier: Yes.

[00:19:51] Regional Variations

James Mintert: Alright, so people are always interested in the regional values. Tell us a little bit about the regional calculations and how those are arrived at.

Todd Kuethe: Yeah, so, um, we have this, uh, set of respondents that again report for their county. Um, and then we aggregate that up to the state level, obviously.

But then, it’s also split into these six regions in the state. Uh, to be totally honest, I’m not, this, this predates me by a long time, how these regions were, uh, put together. And I, and it seems like everybody I talked to would like the regions to be defined a little differently than they are. But these are the regions that we kept just to have a long history of the data.

And then obviously we, uh, have areas that have sort of more active land markets than others, and sort of more of those professionals that work in those spaces. So, you know, as you move farther down in the south, we maybe have, Fewer professional farm managers, fewer appraisers, lenders, so we don’t have quite as much coverage there. Um, and those markets are a little bit weird, so for a lot of reasons, we tend to see much more dynamic, uh, sort of movement year to year in the southern part of the state, in terms of prices up and down.

James Mintert: We should probably characterize what you mean by the word weird.

Todd Kuethe: Oh!

James Mintert: Unusual, maybe?

Todd Kuethe: Yeah, sorry, let me, uh, say that again.

James Mintert: What are you thinking about there?

Todd Kuethe: Yeah, um, where did I say weird? I’m not even listening to myself.

James Mintert: Well, you characterize southeast and southwest as being, and I think what you’re really focusing on the fact that you’ve got more things influencing land values than just corn and soybeans.

Todd Kuethe: Southwest and southeast, we can’t just think of it as bare corn and soybean land, right? We have forest, we have uh, recreational lands, we have Uh, a different mix of com commodities, complex set of commodities. There’s a lot of things that can drive that land price, other than just corn and soybean yields. Right, and so, the, the prices tend to be driven by different set of dynamics than we do in just a corn, soybean, flat corn and soybean area.

And then in addition to that, We, uh, sort of have, uh, fewer land market experts that really operate in those areas. So they’re much harder to characterize for a number of reasons.

James Mintert: And that contributes to the fact over the years you get more variability showing up in the values for southeast Indiana and southwest Indiana.

Todd Kuethe: Yeah.

James Mintert: For all the reasons you just described, right?

Todd Kuethe: Yeah.

Michael Langemeier: Now one thing I want to make sure, and we probably should have said it earlier Todd, this is not, we’re talking about non irrigated land.

Todd Kuethe: Correct. We ask about, uh, sort of bare farmland. Corn and soybean production land, right? So we’re also not really thinking about pasture.

Michael Langemeier: Or hay ground.

Todd Kuethe: Yes, or hay, yeah.

James Mintert: So as you look at it, given all those caveats, the top end was, what and where?

Todd Kuethe: Uh, so the, the top value per acre always is, they’re typically found in the upper part of the state. That will shift around year to year but generally hangs around the central, west central part of the state. Occasionally we’ll see the north or northeast kind of dominate that. Um, And we see those parts of the state, the increases are much closer to what we see, an aggregate, up by a little bit. Um, then we get to sort of different quality grades. The, the, the lower quality land tends to sell for reasons not just agricultural production, right? So we do see, sometimes those markets tend to be, uh, Uh, sort of, again, more fluctuation in terms of going up faster or going down slower, or going down faster when they’re declining.

James Mintert: So the typical is to see the highest values on the highest quality land in the northern half of the state. But in this year’s survey, you showed a big jump for southwest. And actually it came in at the top end for the whole state, which I have to say was surprising to me. I didn’t expect to see that.

But again, I’m thinking about The data collection process in Southwest, and I actually think, and we were talking about this before the podcast started, the fact that the Southwest region really could easily be subdivided into two regions, right? One with fairly intensive corn soybean production, and another component, Without a lot of intensive corn and soybean production, a lot more pasture land, a lot more, uh, timber land, et cetera, right?

Todd Kuethe: Yeah, and, and the other thing, too, is that, uh, and we’ll talk about, like, you know, urban influence and development and the, you know, we, we give our respondents the opportunity to give us just sort of some general market commentary. Um, and in the south, we get, we’ve gotten in the last several years, a lot of, uh, The things about, you know, people buying farmland for retirement purposes or, uh, potentially maybe to convert it or they’ll buy it to have a small house and rent. Um, and, and we see a lot more of that activity in the southern part of the state too.

James Mintert: Yeah, which contributes to the variability, right?

Todd Kuethe: Yeah.

James Mintert: All right. So if you take a look at the Indiana values and look at it over time, that chart is kind of interesting just to take a look at and the steepness of the increase that’s taken place, especially for top quality and to some extent, average quality land over the last roughly four to five years is quite striking.

Todd Kuethe: Yeah. Uh, in fact, when we, when I, when I took over the survey in 2020, right. Um, and so. We had that kind of, you know, obviously the start of COVID, there’s a lot of uncertainty as to what was going to happen. And we saw these really high farmland prices, really across the Corn Belt in general. Same thing with Iowa State and the USDA, um, with the things that they’re running.

Um, and then there were a lot of people that said, well, this isn’t, doesn’t seem to be sustainable. We don’t think this will happen forever, right? And we’re seeing a, instead of a, you know, we’re not seeing a decline, but we’re seeing, we’re seeing a decline. sort of a slow increase over the last year. Um, and some evidence that maybe that that growth is starting to slow a bit. Um, but yeah, we, this is not the giant, uh, inertia we had coming out of 2020.

[00:25:50] Influential Factors

James Mintert: So one of the things that you do on the survey, and this goes back a number of years, is to ask people about a series of factors that could potentially influence land values and share those results with us.

Todd Kuethe: Yeah, so this is without a doubt my favorite part of the survey, in part because uh, this is the thing people hassle me about the least, right? The prices people will say like, I don’t think this is quite right. Uh, but this one, it seems like everybody kind of agrees, right?

And so we ask all of these experts, what, you know, these things that we tend to think sort of move farmland prices, which is basically, The returns you get from owning farmland, that’s the biggest one, right? But then all of the things we think about as farmland is an investment. So how does it compare to other investments? What are the interest expenses we’d have on a, on a, on a mortgage, right? Um, and then ask them to rate, you know, is this important in your market now? And as it, ranges from, you know, very important and positive to very important and negative. Uh, we, we ask them sort of on a five point scale, you know, how much is this really happening, and then we aggregate those up.

And so we think about like 2020, for example, uh, when I took over the survey, everything that we would ask about from income to crop, or to commodity prices, interest rates, exports, Inflation, agricultural policy, they were all putting positive pressure on farmland prices. Everything that we think could drive farmland prices is really pushing prices up. Um, and then over the last couple of years, we’ve started to see, uh, interest rates putting negative pressure as the Fed was increasing interest rates. Um, and then we see our mortgage rates increasing. That’s putting downward pressure, moderating pressure, what we sort of had the last couple of years.

Into ’24 now we’re seeing downward pressure from commodity prices, uh, particularly crop prices, but also farm incomes, um, export levels, and now we’re starting to actually see a little bit of downward pressure from The return to alternative investments, right? So as the, as the economy starts to improve and change, um, they’re saying, well actually there’s maybe other things we could be getting better returns from than farmland. So maybe there’s a slowing, uh, sort of non farm investment interest in, in farmers, or people outside of the farm sector, are they looking at other things to put their money into?

James Mintert: So Todd, uh, given that Michael and I do the Ag Economy Barometer, I’ve kind of turned into an index person. So I’m looking at the results, and I think I could start thinking about a way to build an index out of this.

Todd Kuethe: Oh, okay. I’ll take it.

James Mintert: And if you look at it, uh, and this year, it’s really interesting. Seven out of the ten factors are showing negative. And as you pointed out, three or so years ago, 10 out of 10 were positive. This strikes me as really starting to illustrate a shift in where we’re headed with respect to farmland values.

Michael Langemeier: I’m gonna stick my neck out here and let’s look ahead to ’25. Of the factors in ’24 that are positive, livestock price is probably still going to be slightly positive. Um, the growth and returns, I’m not exactly sure how they’re interpreting that, but that probably will stay slightly positive. The one that I’m worried about is liquidity.

We’re gonna we’re burning through some liquidity now because the low net lower net returns people are gonna people are gonna want to hold on to that liquidity and not necessarily dump it into the farmland market like they did the last two or three years. And so and so 2025, I’m not saying we’re gonna have a crash. I just don’t think it’s It’s going to be similar to ’24, if not slightly worse, if you look at the factors.

Todd Kuethe: Another thing that I didn’t put in here, I talk about it in the report, which also, uh, to go back, the, uh, those regional things are all available in the report, right, so we mostly focus at the state level. Um, the, uh, Was asking about land converting out of agriculture to other things. And that’s the thing that’s like, that’s what everybody’s talking about in Indiana the last two years, right? And it goes to things like solar development, but also, you know, large public projects, large private projects, housing construction, Uh, so I did ask about that. I didn’t put it in because we only have the year for 2024. But that is almost as strong as interest rates, but in the positive. So what they’re saying is really that conversion potential is really holding prices up.

Michael Langemeier: On the positive side.

Todd Kuethe: Yeah, and then the other thing here that we don’t sort of include in this bracket that we ask about is the value, the volume of land for sale in the market and everyone is basically everyone is reporting, there’s a lot less for sale in 2024 than what we saw in ’23. We saw the same thing in ’23 relative ’22 so that the supply sort of people not as prone to want to sell out, sell their land to someone else, uh, is, is really kind of keeping that price high, right? Because the demand is still pretty robust. We see a lot less for sale, so that’s kind of keeping prices up.

Um, but those are the kind of things off of this chart that I think could, uh, still kind of help keep land prices up.

Michael Langemeier: In that 0-5%.

Todd Kuethe: Yeah, that will keep it from totally maybe tipping downward.

James Mintert: Following up though, I guess, wrapping, putting a little wrap on this with respect to what Michael was saying. In this year’s survey, liquidity was still a positive. Looking ahead to the next year’s survey, I think, Michael, you’re kind of anticipating that turning into a negative.

Michael Langemeier: More neutral, slightly negative.

James Mintert: Yeah. Because people are going to want to hang on to it, right? If the downturn continues, which is kind of what we expect at this point.

So, one of the things that influences farmland values is what’s going on with interest rates. And we just saw that with respect to the survey question about factors influencing values. So you took a look at farm mortgage rates versus the federal funds rate, which is the policy rate, and the prime interest rate. Talk to us a little bit about that.

Todd Kuethe: Yeah, so, yeah, I mean, we, we ask in the survey about expected interest rates, right? I mean, um, one of the challenges, kind of, which interest rate do we think about, right? And, and as economists, what interest rate do we think about when we think about the farm sector? Um, so obviously, we see a lot of discussion about the fed funds rate. That’s the policy rate, Um, that’s what the Fed pays banks on overnight deposits, right? Um, and that’s the one that they can influence, right? So the Federal Open Market Committee gets together and they vote, uh, what should the interest rate be? Um, banks take that information and they use that to inform how they set other rates.

The one that we think about next, I think, is the prime rate, right? So that’s the short run business lending, which has a relatively fixed relationship to the Fed funds rate, basically their cost of doing business, right? So we want to Charge these, these, uh, these successful businesses as least we can to keep them as part of our, uh, financial relationship. Um, and so they tend to sort of move lockstep.

Where farm mortgage rates, they use that as part of the, uh, information set. But they also look at the, what’s the risk of lending to the ag sector in long term relative to businesses, right? There’s a, there’s a lot of things that sort of go into that.

And so, You know, over the last couple of years, we’ve seen the Fed increase that policy rate. Um, started to level off a little bit. They’re giving some indication that it could decline. Um, and we saw prime rates sort of move lockstep with that in terms of what they’ve, uh, increased and sort of held steady. Um, the farm mortgage rates have gone up, but not as fast as what we’ve seen for the Fed funds rate or the prime rate. Um, in fact, now we see the farm mortgage rate below the prime rate, meaning that, uh, lenders essentially feel more confident that long run investments in the ag sector are better than short run business commercial lending. Um, there’s a lot less risk there, they feel right.

Um, and so, you know, if the Fed starts to unwind, and decrease the Fed funds rate. ..We could maybe expect prime or farm mortgage rates to start to come down, but I don’t think we’ll see them quite as quick. Um, in part because it hasn’t built up as quick. There’s less of a cushion, um, between that and the, and the farm mortgage or the, the Fed funds rates.

James Mintert: So state it another way right now, the, um, prime rate is running almost a full point ahead of farm mortgage rates based on the most recent data that we’ve had.

Todd Kuethe: Yep.

James Mintert: And If the Fed loosens as almost everybody expects over the next few quarters, the likelihood is we’ll see that prime rate and the farm mortgage rate probably collapse on each other. Does that seem…

Todd Kuethe: Yeah, I think that’s more likely. Right. I think the most likely is you see the farm mortgage rate move very little and the prime rate sort of come down to it.

James Mintert: Um, Michael, I think you had a comment with respect to thinking about What this means with respect to the capitalization rate and the impact on farmland.

Michael Langemeier: I don’t want to confuse the listener here, but we throw these terms out, the interest rate obviously is very important to land values, but we also have this term called capitalization rate. And what that is, is cash rent divided by land values, and the point I want to make there is that’s trended downward for a long time now, and currently it’s about two and a half percent, if not slightly lower. Uh, depending on the region you look at, the state you look at. I think for Nebraska it’s closer to 2 percent Uh, for some land I own out there.

And so, and so it’s really low right now. Uh, if these interest rates stay relatively high compared to what they have been since 2008, there’s probably a little bit of pressure to increase, uh, the capitalization rate a little bit. There’s certainly not a one to one there, but if, but higher interest rates over a long period of time tend to increase the capitalization rate, uh, not just for land, but for also for stocks. Uh, but, but, but, but given the fact that, as we were talking about earlier before the podcast, given the fact that the Fed’s going to adjust the, uh, adjust the, adjust the Fed funds rate and the prime rate’s gonna come down probably 2%, there’s probably not that much pressure.

So what I’m, I’m really arguing in a very roundabout way is the current 2. 5 percent uh, capitalization rate’s probably gonna hold for a while. We’re not going to go any lower, but there’s, but, but, but given this, that the Fed’s reducing the interest rates, it’s probably taking off a little of the pressure to increase those.

James Mintert: Yeah, stated another way, if we maintain, if the Fed wasn’t going to loosen, there might be some pressure to raise that cap rate. And raising the cap rate has a negative impact.

Michael Langemeier: Decreases land values.

James Mintert: On land values. Lowering the cap rate has a positive impact. And can actually have, particularly over long periods of time. Big impact.

Michael Langemeier: Oh, huge impact. Part of the part of the increase from 2007 to today for land values is low cap rate.

James Mintert: Yeah.

Michael Langemeier: Low interest rate and low cap rate.

James Mintert: And you can make that argument with respect to every asset in the U.S., right?

Michael Langemeier: Yeah, stocks.

Todd Kuethe: Yeah, that’s, that’s

Michael Langemeier: commercial real estate, residential real estate,

Todd Kuethe: macroeconomists talk about sort of the secular decline of of cap rates, you know, cap rate suppression across the economy since the nineties really.

Michael Langemeier: Yeah.

[00:36:43] Development & Its Impact on Land Values

James Mintert: So one of the questions, and you kind of alluded to this earlier, is this whole idea of the development premium. And, and so you’ve been asking about that more explicitly in the survey, right?

Todd Kuethe: Yeah. And we’ve tracked, you know, since the, the start of the survey, the value of land transitioning out of agriculture, right. So, and that, and that’s a big. market driver, particularly in sub markets where we see a fair amount of development. Um, but then there’s kind of spillover effects to where it’ll affect places, um, all over the state.

And so, I think that the thing that I get calls and requests about the most over the last couple of years is really questions about what do you think development is going to do to land. Um, part of it is we’re seeing, I mean we’ve always had sort of, um, you know, across the Corn Belt, across the United States, kind of like urban fringe development and conversion of land. But now we have things like solar or other infrastructure projects that are maybe happening outside of that sort of, you know, traditional kind of suburban ring. Um, and so, uh, there’s a lot of concern.

Uh, so we, we look at the value of land transitioning out of agriculture. And that’s, that’s always been, High above what we see even for top quality land that sort of remains in farming, right? We’re actually looking closer now to more than doubling your land Again on average across the state if you sell it for transitional purposes, you’ll more than double what you would make for Agricultural production.

James Mintert: Yeah to put that number in perspective. You’re showing just 14, 400 for the top quality land in Indiana and with that development or transition premium in there, you’re up over 30, 000 an acre, right?

Todd Kuethe: Yeah, yeah, and so again, more than doubling in terms of, you know, going from 14, 000 to you know, 30, 000 to 31, 000.

Michael Langemeier: And obviously as you get closer and closer to where it’s already been developed, that 30, 000 will be higher. This is an average.

Todd Kuethe: Yeah, yeah, yeah, yeah, yeah. Yeah, no, and, and, I mean, people, I’m sure you get it as well, call with some very high sales and places say, can you believe what this one had? Oh, yeah, yeah.

Michael Langemeier: Very close to where there’s already development.

James Mintert: So, the interesting thing, Michael, is, you know, we’ve been asking about this, The impact of various factors on farmland values in the Ag Economy Barometer Survey. And it’s a different survey, different pool of people. And it’s a national survey as well, not just an Indiana survey.

But one of the things we’ve been picking up lately is people telling us they do see an impact coming out from Energy development and really focusing on the combination of wind and solar. And that most of those are for rental agreements, not for sales. Very few, that I’m aware of anyway, in Indiana, would be a sale for solar development. Almost always those are leases. But that’s a factor, right, going in here, as opposed to, uh, a factor influencing land values, right?

Todd Kuethe: No, certainly.

Michael Langemeier: Yeah, rental rate goes up, and the present value of the land goes up.

James Mintert: So you looked at a little more specific aspect of development, namely what’s going on in the housing market relative to land values.

Todd Kuethe: Yeah, and part of it is that’s the easiest thing to track, right? So we, the, the state of Indiana has, uh, you can look at housing permits by county, by the state level. Um, and really, the, looking at housing construction permits in Indiana really tracks how that transitional premium. So that transitional land relative to top quality farmland really follows what we see in terms of permit construction, right?

So we had, uh, really, uh, high amounts of construction from kind of going the 1990s till, uh, probably right before or around the 2008 financial crisis. And then when we see that happen, we see a real reduction in, in permits and construction. And that housing premium. That we see, or that transitional premium from it really fell. Um, and then starting in about 2010, ’11, ’12, we start to see that rebound and start to rebuild in construction. And then we see that premium really go up again. And so, um, in fact, you know, that premium is almost back to where we were pre 2000. Uh, 7, 8, um, but just a little bit below what we are seeing in terms of a percentage value. Um, and similar with construction permits, right? So construction has really gone up, uh, but we’re still below where we were kind of right before the financial crisis.

James Mintert: So looking at the chart that you’ve got, and just to remind the listeners, you have an opportunity to download the charts that we’re looking at as we record this podcast. But looking at the chart, it’s really interesting to see that that development premium in about what, 2011 to 2012 got pretty close to zero, above just top quality. That’s a, to me, I have to say, a little bit surprising.

Todd Kuethe: Well, you know, I, maybe it is a little bit surprising other than, you know, a lot of, we’ve talked about it. I’ve done some research in other, uh, parts of the Corn Belt. Uh, and that’s, that was sort of observed around the time in, I mean, again, it goes back to that RFS, right, where commodity prices are so high, uh, the cost of borrowing is slow, so low, right, because the, the, the 2008 crisis is also when we cut rates to the historic low, the first time they’ve been that low in probably ever. Um, and so, the, the value of land for its agricultural purposes was particularly high. Um, there was very low demand for transition, um, and, and farmers were, it was a, you know, a golden age of commodity prices, um, and so it really drove that premium down. In fact, there were, uh, I remember at that time talking to, uh, people that bought land, uh, uh, to convert it, realizing with the financial crisis they couldn’t convert it, and they were like we don’t want to sell this back, now we want to turn, we want to keep it as farmland, tell us how to farm it, right, because the, the, the commodity returns were so high at that time.

James Mintert: And your data is looking at Indiana housing starts or permits. But actually, on a national basis, those also collapsed during that time frame.

Todd Kuethe: Oh, even more so than we had in Indiana.

James Mintert: Yeah, you had two things going on at the same time that were causing the relationship to do exactly what your data is showing, right?

Todd Kuethe: Yeah, which essentially, we have one sector of the economy, a huge sector in terms of housing, construction, uh, that was just, you know, record low, while we as a, you know, sort of commodity production, particularly corn and soybeans, record all time high, right? That’s what we have sort of, uh, doom and gloom in one area, uh, golden age in another, and you can really see that in the data.

[00:43:13] Future Projections

James Mintert: So Todd, one of the things you do in the survey is ask people to, ask people, uh, not only what change in price or value they saw in their region, uh, from December to June of this year, but you asked them to project and forecast what they think is likely to happen between June and December, and those results are very interesting.

Todd Kuethe: Yeah, so the first part that is interesting to me is the, what the, what our respondents observed between December of ’23 and June of this year when the survey went out, June of ’24. Which is In aggregate, kind of across the state, they saw prices declining, right? So meaning that that, that aver that aggregate increase we saw from June of ’23 to June of ’24, mostly that growth took place at the end of ’23 and has been declining at the first half of ’24. So, some indication maybe that Uh, at least in kind of a local time, again, uh, Uh, we’ve seen maybe kind of a peak and prices starting to recede a little bit. Um, and they actually expect that, that decline to continue through the rest of this calendar year.

So, they saw prices declining in the first half of ’23. or ’24, sorry, relative to ’23 and they think that’s going to continue. But again, uh, you know, at the top in average quality, a little bit more muted. Um, actually expecting, you know, uh, maybe the decline to increase a little bit in that poor quality land across the state. But, uh, again, they’re, they, They aren’t really optimistic about sort of the rest of ’24.

James Mintert: And when I look at your data, particularly this projection for the last half of ’24, it makes a lot of sense to me. What they’re really saying is they expect demand to hold pretty strong on high quality farmland and the pressure to be mostly on poor quality land, fewer buyers stepping up to the plate. Makes a lot of sense from a farm management standpoint. Do you agree with that, Michael?

Michael Langemeier: Definitely. We’re talking about cash rents here, but the profitability prospects on poor quality land are not near as good. None of them are good, but not near as good as the average and top.

[00:45:24] Additional Data & Context

James Mintert: So, Michael, this is a good time maybe to talk about what we picked up on our most recent Ag Economy Barometer Survey, which was done in the middle of August. And, of course, every month we ask people about their farmland price expectations looking out 12 months. And I want to emphasize this is a national survey. It’s not an Indiana survey. So it’s a fairly broad survey, but the results in August were quite interesting and really kind of correlate with what Todd was picking up on the Indiana survey.

Michael Langemeier: Definitely. They’re still, they’re still overall optimistic. But only by a slight amount. Uh, if you did an index of this, it’d be 105, where 100 is neutral and below 100, uh, would be, would be pessimistic. And, and essentially what happened in August is we saw a 10, 10 to 11 percent increase in those that said, lower farmland values. To put that in perspective, it was about 13 percent in July, now it’s 24 percent in August. That is a huge movement. Uh, you know, it’s pretty rare since we’ve been asking this question that we’ve seen that big a movement in terms of people that think we’re going to have lower farmland values in the next 12 months. Uh, the people that thought we were going to have higher farmland values also went down a little bit. Uh, but it’s, it’s very, very noticeable. That the pessimists came out of the woodwork in August compared to July.

James Mintert: And when you look at our survey for the barometer on these farmland values going back to 2021, and that’s when people were most optimistic that farmland values are going to continue to increase. And the way I like to look at that slide or that, that data over time is there’s been an erosion of confidence. And farmland that is continuing to grow, uh, I think that’s exactly what you’re picking up on the Indiana survey, Todd.

Todd Kuethe: Yeah, and I think, you know, you talked about sort of people being on the margin, right? So I think when you think about, you know, farmers and how they think about land, there’s sort of this group that’s always optimistic, they think it’s great, they want to own more of it, they, you know, they love it. And then there’s always this pessimistic group that, like, it’s about to fall apart. And the, where the people on the margin are those that are switching from it’s pessimistic, optimistic, and back and forth, and really I think what’s happening is that marginal group, the people on the margin, are now starting to be more negative.

James Mintert: Good point.

Michael Langemeier: We can relate that back to the factors that Todd was talking about, because that’s also my favorite chart. You go back to that ’21 ’22 period, all the factors are positive, like you were saying. Therefore, we had some pretty strong, you know, you know, a lot of people thought that land values were going to continue to increase, rightfully so, I would argue, and then we went into ’23, where it was more, a little bit more mixed, still quite a few factors that, factors that were positive, and so we saw land values come, you know, not quite as strong as they were, uh, in ’21 and ’22, and then we moved into ’24, where more of the factors were negative. And we got, we got less difference between those that thought there was thought land values are going to increase and decrease. And then, uh, you know, going on to ’25, perhaps even more factors that are negative. And you’re going to see it more. They’re gonna be more neutral overall. And so I think, I think it all has to depend on, on, on, on the, on these factors. How many, how many factors are positive? How many are negative?

Todd Kuethe: Well, and I think the ones that are positive, people feel less strongly that those are positive and those things that are negative, they’re feeling more strongly that those are negative, right? And so,

Michael Langemeier: Well, as economists, we always think the fundamentals are the, are the returns and the interest rates. There is other things that impact land values, but those are the fundamentals. They’re not positive.

[00:48:53] Conclusion

James Mintert: So let’s just kind of summarize here, Todd.

Todd Kuethe: Yeah, so again, you know, the kind of headline that I may be getting tired of writing is that, uh, Indiana prices are at a new record high, right, because that tends to be true more often than not as prices kind of generally increase. Uh, a lot like what we saw over the last year, sort of 4 to 5 percent increases year over year. We’re kind of back to that, kind of our expected change, right? Cooled off a bit from those rapid appreciation. We saw in ’21-’20, um, a lot of that has to do with the interest rate pressure we’ve talked about, but also lower commodity prices, uh, lower returns, um, putting downward pressure on land.

Again, maybe the thing kind of keeping it up are things like development pressure, or just fewer people wanting to sell land. Um, but in, in aggregate what we see sort of across the state is sort of modest growth from ’24 over ’23. The bulk of that took place at the end of ’23. Um, there’s some signs that we’re seeing declines through the first half of ’24. People expect that to sort of continue going into ’24. Um, so people are, it appears our respondents at least, a little bit gloomier now than they were a year ago. Um, and they don’t, uh, seem to think that that gloominess is going to go away magically. Um, and so, uh, I don’t think we’re at a place where I say, you know, price is about to fall off a cliff, things are going to, there’s still things keeping positive pressure, um, but maybe a little less optimistic about, you know, the remainder of ’24 than we were, you know, about the remainder of ’23 a year ago.

James Mintert: So that wraps up our podcast for today. You can get full details on our website. And Todd, you’ve got a comprehensive report. You can also watch this again and download the slides that we were discussing as we recorded the podcast. So I want to thank my colleagues, Dr. Michael Langemeier and Dr. Todd Kuethe for joining us today. And on behalf of the Center for Commercial Agriculture, I’m Jim Mintert. Thanks again for joining us.